Tax Finals Reviewer

CHIT: Tax 1 Finals Reviewer
A. Income Tax Systems

Tan v. Del Rosario
Schedular approach is a system employed where the income tax treatment varies and made to
depend on the kind or category of taxable income of the taxpayer. On the other hand, global
treatment is a system where the tax treatment views indifferently the tax base and generally
treats in common all categories of taxable income of the taxpayer.
To elaborate a little, the phrase “income taxpayers” is an all embracing term used in the Tax
Code, and it practically covers all persons who derive taxable income. The law, in levying the
tax, adopts the most comprehensive tax situs of nationality and residence of the taxpayer (that
renders citizens, regardless of residence, and resident aliens subject to income tax liability on
their income from all sources) and of the generally accepted and internationally recognized
income taxable base (that can subject non-resident aliens and foreign corporations to income
tax on their income from Philippine sources). In the process, the Code classifies taxpayers
into four main groups, namely: (1) Individuals, (2) Corporations, (3) Estates under Judicial
Settlement and (4) Irrevocable Trusts (irrevocable both as to corpus and as to income).
B. Features of the Philippine Income Tax Law

1. Direct Tax
CIR v. Japan Airlines
The proceeds from sales of Japan Airlines tickets sold in the Philippines is income tax, a
direct tax on the income of persons and other entities "of whatever kind and in whatever form
derived from any source.”
2. Progressive
Reyes v. Almanzor
Under Art. VIII, Sec. 17 (1) of the 1973 Constitution, then enforced, the rule of taxation must
not only be uniform, but must also be equitable and progressive. Taxation is said to be
equitable when its burden falls on those better able to pay. Taxation is progressive when its
rate goes up depending on the resources of the person affected
3. Comprehensive
4. Semi-schedular or semi-global tax system
C. Criteria in Imposing PH Income Tax
D. Types of PH Income Tax
E. Kinds of Taxpayers
1. Individual taxpayers
a. Citizens
b. Aliens
i. Resident Aliens
Garrison v. CA
What the law requires, in determining whether US nationals cannot be considered as resident
aliens as they intend go back to the US on the termination of their employment in the PH, is
merely physical or bodily presence in a given place for a period of time, not the intention to
make it a permanent place of abode.
The Supreme Court further held that, as laid clearly in RR No. 2, whether an alien is a
transient or not is determined by his intentions with regard to the length and nature of his
stay. A mere floating intention indefinite as to time, to return to another country is not
sufficient to constitute him as a transient. If he lives in the Philippines and has no definite
intention as to his stay, he is a resident.15 One who comes to the Philippines for a definite
purpose, which in its nature may be promptly accomplished, is a transient.16 But if his
purpose is of such a nature that an extended stay may be necessary for its accomplishment,
and to that end the alien makes the Philippines his temporary home, he becomes a resident,
although he intends to return to his domicile abroad.
ii. Non-resident aliens
c. Special class of Individual Employees

i. Minimum Wage Earner
Soriano v. SOF
Section 22(HH) says a minimum wage earner must be one who is paid the statutory minimum
wage if he/she works in the private sector, or not more than the statutory minimum wage in
the non-agricultural sector where he/she is assigned, if he/she is a government employee.
Thus, one is either an MWE or he/she is not. Simply put, MWE is the status acquired upon
passing the litmus test - whether one receives wages not exceeding the prescribed minimum
wage.
d. Estates and Trusts

2. Corporations
a. Domestic Corporations
b. Foreign corporations
N. V. Reederij “Amsterdam” v CIR
In order that a foreign corporation may be considered engaged in trade or business, its
business transactions must be continuous. A casual business activity in the Philippines by a
foreign corporation, as in the present case, does not amount to engaging in trade or business
in the Philippines for income tax purposes.
A domestic corporation is taxed on its income from sources within and without the
Philippines, but a foreign corporation is taxed only on its income from sources within the
Philippines. However, while a foreign corporation doing business in the Philippines is taxable
on income solely from sources within the Philippines, it is permitted to deductions from gross
income but only to the extent connected with income earned in the Philippines. On the other
hand, foreign corporations not doing business in the Philippines are taxable on income from
all sources within the Philippines, as interest, dividends, rents, salaries, wages, premiums,
annuities Compensations, remunerations, emoluments, or other fixed or determinable annual
or periodical or casual gains, profits and income and capital gains" The tax is 30% (now
35%) of such gross income.
Amsterdam is a foreign corporation, not engaged in trade or business within the Philippine
and not having any office or place of business therein. It is taxable on income from all
sources within the PH, as interest, dividenst, rents, salaries, wages, premiums, annuities,
compensations, remunerations, emoluments, or other fixed or determinable annual or
periodical or casual gains, profits and income and capital gains, and the tax is equal to thirty
per centum of such amount, under the Tax Code.
Marubeni Corp v. CIR

The general rule that a foreign corporation is the same juridical entity as its branch office in
the Philippines cannot apply here. This rule is based on the premise that the business of the
foreign corporation is conducted through its branch office, following the principal-agent
relationship theory. It is understood that the branch becomes its agent here. So that when the
foreign corporation transacts business in the Philippines independently of its branch, the
principal-agent relationship is set aside. The transaction becomes one of the foreign
corporation, not of the branch. Consequently, the taxpayer is the foreign corporation, not the
branch or the resident foreign corporation. Corollarily, if the business transaction is
conducted through the branch office, the latter becomes the taxpayer, and not the foreign
corporation.
CIR v. British Overseas Airways Corp

An international airline, like BOAC, which has appointed a ticket sales agent in the
Philippines and which allocates fares received to various airlines on the basis of their
participation in the services rendered. although BOAC does not operate any airplane in the
Philippines, is a resident foreign corporation subject to tax on income received from
Philippine sources. It was engaged in selling and issuing tickets, breaking down the whole
trip into series of trips, receiving the fair from the whole trip, and allocating to various airline
companies on the basis of their participation. They are functions that are normally incident to
for the purpose and object of its organization as an international air carrier. Hence, it is a
resident foreign corporation subject to tax.
CIR v. Japan Airlines

For the source of income to be considered as coming from the Philippines, it is sufficient that
the income is derived from activities within this country regardless of the absence of flight
operations within Philippine territory. JAL constituted PAL as local agent to sell its airline
tickets. Hence, it is clear that JAL is a resident foreign corporation, doing business in the PH.
The sale of tickets is the very lifeblood of the airline business.
South African Airways v. CIR

Off-line air carriers having general sales agents in the Philippines are engaged in or doing
business in the Philippines and that their income from sales of passage documents here is
income from within the Philippines.
Air Canada v. CIR

An offline international air carrier selling passage tickets in the Philippines, through a general
sales agent, is a resident foreign corporation doing business in the Philippines.
c. Joint Ventures and consortiums

3. Partnerships
a. Elements
b. Co-ownership is not taxable as a corporation
Obillos v. CIR
A co-ownership who own properties which produce income should not automatically be
considered partners of an unregistered partnership, or a corporation, within the purview of the
income tax law. The essential elements of a partnership are two, namely: (a) an agreement to
contribute money, property or industry to a common fund; and (b) intent to divide the profits
among the contracting parties. Here, there is no evidence that petitioners entered into an
agreement to contribute money, property or industry to a common fund, and that they
intended to divide the profits among themselves. The sharing of returns does not in itself
establish a partnership whether or not the persons sharing therein have a joint or common
right or interest in the property. There must be a clear intent to form a partnership, the
existence of a juridical personality different from the individual partners, and the freedom of
each party to transfer or assign the whole property.
Pascual v. CIR
The sharing of returns does not in itself establish a partnership whether or not the persons
sharing therein have a joint or common right or interest in the property. There must be a clear
intent to form a partnership, the existence of a juridical personality different from the
individual partners, and the freedom of each party to transfer or assign the whole property.
Afisco Insurance Corp v. CIR

Where several local insurance ceding companies enter into a Pool Agreement or an
association that would handle all the insurance businesses covered under their quota-share
reinsurance treaty and surplus reinsurance treaty with a non-resident foreign reinsurance
company, the resulting pool having a common fund, and functions through an executive
board and its work is indispensable, beneficial, and economically useful to the business of the
ceding companies and the foreign firm, such circumstances indicate a partnership or an
association taxable as a corporation.
Ona v. CIR
The income from inherited properties may be considered as individual income of the
respective heirs only as long as the inheritance or estate is not distributed, or, at least,
partitioned. But the moment their respective known shares are used as part of the common
assets of heirs to be used in making profits, it is but proper that the income from such shares
should be considered as part of the taxable income of an unregistered partnership.
Evangelista v. Collector
The Tax Code includes partnerships within the purview of the term “corporation”, with the
exception of duly-registered general copartnerships.
4. General Professional Partnerships

Carag, Caballes, Jamora, and Somera Law Offices
A general professional partnership, unlike an ordinary business partnership (which is treated
as a corporation for income tax purposes and so subject to the corporate income tax), is not
itself an income taxpayer. The income tax is imposed not on the professional partnership,
which is tax exempt, but on the partners themselves in their individual capacity computed on
their distributive shares of partnership profits.
F. Income Taxation
1. Definition
Conwi v. CTA
Income Tax is an amount of money coming to a person or corporation within a specified
time, whether as payment for services, interest, or profit from investment.
2. Nature
Republic v. MERALCO
Income tax is imposed on an individual or entity as a form of excise tax or a tax on the
privilege of earning income. In exchange for the protection extended by the State to the
taxpayer, the government collects taxes as a source of revenue to finance its activities.
G. Income
1. Definition
Conwi v. CTA
An income is defined as an amount of money coming to a person or a corporation within a
specified time.
Fisher v. Trinidad
Mere advance in the value of property or a corporation in no sense constitutes the income
specified in the law. Such advance constitutes and can be treated merely as an increase in
capital.
Eisner v. Macober
Income may be defined as the gain derived from capital, from labor, or from both combined,
including profit gained through sale or conversion of capital.
Commissioner v. Glenshaw Glass

Income is taxable when there are gains, profits, and income derived from any source
whatever.
2. Nature
Madrigal v. Rafferty
Income is that flow of services rendered by that capital by the payment of money from it or
any other benefit rendered by a fund of capital in relation to such fund through a period of
time. Income is the “fruit” of capital or labor severed from the “tree.”
a. Difference between income and capital

Chamber of Real Estate and Builder’s Assocation v. Romulo
Income is distinct from capital. Income means all the wealth which flows into the taxpayer
other than a mere return on capital while capital is a fund or property existing at one distinct
point in time while income denotes a flow of wealth during a definite period of time. Income
is gain derived and severed from capital.
Madrigal v. Rafferty
Income as contrasted with capital or property is to be the test. The essential difference
between capital and income is that capital is a fund; income is a flow. A fund of property
existing at an instant of time is called capital. A flow of services rendered by that capital by
the payment of money from it or any other benefit rendered by a fund of capital in relation to
such fund through a period of time is called an income. Capital is wealth, while income is the
service of wealth. A tax on income is not a tax on property. "Income," as here used, can be
defined as "profits or gains."
Eisner v. Macomber
A stock dividend, evincing merely a transfer of an accumulated surplus to the capital account
of the corporation, takes nothing from the property of the corporation and adds nothing to that
of the shareholder; a tax on such dividends is a tax on capital increase, and not on income,
and, to be valid under the Constitution, such taxes must be apportioned according to
population in the several states.
Fisher v. Trinidad
When a corporation issues stock dividends, it shows that the corporation’s accumulated
profits have been capitalized, instead of distributed to the stockholders or retained as surplus
available for distribution. The stockholder receives nothing out of the corporate assets for his
separate use and benefit but a representation of his increased interest in the capital of the
corporation. The capital still belongs to the corporation as there is no separation of interest.
Stock dividends are not income as they only represent the company’s accumulated profits
that have been capitalized. It is not a realization on the profits of the stockholder, but rather, a
postponement on the realization of the profits.
Commissioner v. Manning
However, stock dividends constitute as income if a corporation redeems stock issued so as to
make a distribution. This is essentially equivalent to the distribution of a taxable dividend the
amount so distributed in the redemption considered as taxable income. (Thus, newly-acquired
shares are subject to income tax.)
Commissioner v. CA
Depending on the circumstances, the proceeds of redemption of stock dividends are
essentially distribution of cash dividends, which when paid becomes the absolute property of
the stockholder, who then cannot escape income tax as he has realized gain from the
redemption.
In determining whether amount distributed in the redemption of stock dividends should be
treated as equivalent of “taxable dividend”, there is no decisive test that can be used.
However, American courts have developed certain recognized criteria: 1) the presence or
absence of real business purpose, 2) the amount of earnings and profits available for the
declaration of a regular dividend and the corporation’s past record with respect to the
declaration of dividends, 3) the effect of the distribution as compared with the declaration of
regular dividend, 4) the lapse of time between issuance and redemption, 5) the presence of a
substantial surplus and a generous supply of cash which invites suspicion as does a meager
policy in relation both to current earnings and accumulated surplus.
For the exempting clause to apply, it is indispensable that: (a) there is redemption or
cancellation; (b) the transaction involves stock dividends; and (c) the “time and manner” of
the transaction makes it “essentially equivalent to a distribution of taxable dividends.” Of
these, the most important is the third.
Murphy v. IRS
The income tax imposed on an award for non-physical injuries is an indirect tax, regardless of
whether the recovery is restoration of "human capital," and therefore the tax does not violate
the constitutional requirement of Article I, section 9, that capitations or other direct taxes
must be laid among the states only in proportion to the population.
3. Taxable Period
4. When Income is Taxable
Commissioner v. CA
The three elements in the imposition of income tax are: (1) there must be gain or profit, (2)
that the gain or profit is realized or received, actually or constructively, and (3) it is not
exempted by
law or treaty from income tax. Any business purpose as to why or how the income was
earned by the taxpayer is not a requirement. Income tax is assessed on income received from
any property,
activity or service that produces the income because the Tax Code stands as an indifferent
neutral party on the matter of where income comes from.
b. Existence of income
Commissioner v. Glenshaw
3-part test to determine whether there is income:
o An accession to wealth;
o Money is clearly realized; and
o Taxpayer has complete dominion (can spend it as he wants).
i. Accession
Cesarini v. US
Old Colony Trust v. Commissioner

When an employer pays for the income tax of the employee, that amount should be
considered as income on the part of the employee, as the Court considered it as compensation
as it was a consideration for the services that the employee rendered with the corporation. It
cannot be a gift as it can be gleamed that the act of the company, even though voluntary, was
done due to the services rendered the employee.
ii. Realization/Severance
Eisner v. Macomber
There is no taxable income until there is a separation from capital of something of
exchangeable value, thereby supplying the realization or transmutation which would result in
the receipt of income. Income is not deemed realized until the fruit has been plucked from the
tree.
Helvering v. Bruun
iii. Dominion/Claim of Right
Helvering v. Horst
The power to dispose of income is the equivalent of ownership of it. The exercise of that
power to procure the payment of income to another is the enjoyment and hence the
realization of the income by him who exercises it. The dominant purpose of the revenue laws
is the taxation of income to those who earn or otherwise create the right to receive it and
enjoy the benefit of it when paid.
North American Oil Consolidated v. Burnet
c. Realization of income
Eisner v. Macomber
Helvering v. Bruun
i. Actual vis-à-vis constructive receipt
Limpan v. CIR
Income is received not only when it is actually handed to a taxpayer but also when it is
merely constructively received by him. The lessees in this case opted to deposit their
payments when the lessor refused to accept the same in 1957. The lessor did not report these
payments in his 1957 income tax return. The Supreme Court held that the failure to report the
said rental income is unjustified as, when the payments were deposited, the lessor was
deemed to have constructive received such rentals.
d. Recognition of income
Mandarin Hotels v. CIR
Following the realization principle, income is generally recognized when both the following
conditions are met:
1. The earning process is complete or virtually complete
2. An exchange has taken place.
e. Methods of Accounting
Consolidated Mines v. CTA
Taxpayer can use any one method, but not a combination of accounting methods. The use of
a hybrid method is not allowed.
a. Cash method vis-à-vis with Accrual Method

CIR v. Isabel Cultural Corp
Revenue Audit Memorandum Order No. 1-2000, provides that under the accrual method of
accounting, expenses not being claimed as deductions by a taxpayer in the current year when
they are incurred cannot be claimed as deduction from income for the succeeding year. Thus,
a taxpayer who is authorized to deduct certain expenses and other allowable deductions for
the current year but failed to do so cannot deduct the same for the next year.
For a taxpayer using the accrual method, the determinative question is, when do the facts
present themselves in such a manner that the taxpayer must recognize income or expense?
The accrual of income and expense is permitted when the all-events test has been met. This
test requires: (1) fixing of a right to income or liability to pay; and (2) the availability of the
reasonable accurate determination of such income or liability.
The all-events test requires the right to income or liability be fixed, and the amount of such
income or liability be determined with reasonable accuracy. However, the test does not
demand that the amount of income or liability be known absolutely, only that a taxpayer has
at his disposal the information necessary to compute the amount with reasonable accuracy.
The all-events test is satisfied where computation remains uncertain, if its basis is
unchangeable; the test is satisfied where a computation may be unknown, but is not as much
as unknowable within the taxable year.
1. Economic Benefit Test

Sproull v. Commissioner
The question then becomes was "any economic or financial benefit conferred on the
employee as compensation" in the taxable year. If so, it was taxable to him in that year. In
this case, there is such economic benefit. Sproull derived an economic benefit from it in
1945. The employer had made an irrevocable transfer to the trust, relinquishing all control.
He was given an absolute right to the funds which were to be applied for his sole benefit. The
funds were beyond the reach of the employer's creditors. Sproull's right to those funds was
not contingent, and the trust agreement did not contain any restrictions on his right to assign
or otherwise dispose of that interest.
Pulsifer v. Commissioner
Under the economic-benefit theory, an individual on the cash receipts and disbursements
method of accounting is currently taxable on the economic and financial benefit derived from
the absolute right to income in the form of a fund which has been irrevocably set aside for
him in trust and is beyond the reach of the payor's debtors.
Petitioners had the right on the winnings on deposit with the Irish Court. The money was set
aside for their sole benefit. All they needed was for their legal rep to apply for funds.
2. All Events Test

US v. Anderson
Only a word need be said with reference to the contention that the tax upon munitions
manufactured and sold in 1916 did not accrue until 1917. In a technical legal sense, it may be
argued that a tax does not accrue until it has been assessed and becomes due; but it is also
true that in advance of the assessment of a tax, all the events may occur which fix the amount
of the tax and determine the liability of the taxpayer to pay it.
US v. General Dynamics
Under an accrual method of accounting, an expense is deductible for the taxable year in
which all the events have occurred which determine the fact of the liability and the amount
thereof can be determined with reasonable accuracy.
It is fundamental to the "all events" test that, although expenses may be deductible before
they have become due and payable, liability must first be firmly established. This is
consistent with our prior holdings that a taxpayer may not deduct a liability that is contingent
nor may a taxpayer deduct an estimate of an anticipated expense, no matter how statistically
certain, if it is based on events that have not occurred by the close of the taxable year.
However, the present case merely involves a mere estimate of liability based on events that
had not occurred before the close of the taxable year, and thus, it does not pass the “all
events” test.
H. Gross Income
1. Definition
CIR v. American Airlines
The enumeration listed under the Tax Code is not exclusive. It merely directs that the types of
income listed be treated as income from sources within the Philippines.
2. Concept of income from whatever source derived

Gutierrez v. CIR
Income derived from expropriation is taxable income and it is within the purview of the term
“sales or exchange” as used in the US Internal Revenue Code.
At the same time, under Sec. 29a of our Tax Code, gains from expropriation would constitute
taxable income from dealings in property growing out of the ownership of such property or as
income derived from any source whatever.
a. Money found by chance

Cesarini v. US
Found money is taxable.
b. Damages
Raytheon Products Corp v. Commissioner
Damages recovered in an antitrust action are not necessarily nontaxable as a return of capital.
As in other types of tort damage suits, recoveries which represent a reimbursement for lost
profits are income. The reasoning is that since the profits would be taxable income, the
proceeds of litigation which are their substitute are taxable in like manner.
Damages recovered for violations of anti-trust acts are treated as income when they represent
compensation for loss of profits. A recovery of future profits is taxable, but a recover for
present profits is not. Compensatory damages are not tax-exempt as they are a return of
capital. Exemption applies only to the portion of these damages that recovers the cost basis of
that capital; any excess damages serve to realize prior appreciation, and should be taxed as
income.
Murphy v IRS
Income tax may be imposed on awards for non-physical injuries (emotional distress).
c. Forgiveness of indebtedness
d. Receipt of accounts previously written off
e. Receipt of tax refunds or credit
f. Illegal Income
James v. United States
Unlawful gains are comprehended within the term “gross income.” The Congress had the
intent to tax income derived from both legal and illegal sources, to remove the incongruity of
having the gains of the honest laborer and the gains of the dishonest immune.
When a taxpayer acquires earnings, lawfully or unlawfully, without the consensual

recognition, express or implied, of an obligation to repay and without restriction as to their
disposition, "he has received income which he is required to return, even though it may still
be claimed that he is not entitled to retain the money, and even though he may still be
adjudged liable to restore its equivalent."
Commissioner v. Wilcox
Taxable gain is conditioned upon 1) the presence of a claim of right to the alleged gain and
(2) the absence of a definite, unconditional obligation to repay or return that which would
otherwise constitute a gain. Without some bona fide legal or equitable claim, even though it
be contingent or contested in nature, the taxpayer cannot be said to have received any gain or
profit within the reach of Section 22(a). In this case, the money was obtained through
embezzled funds.
Rutkin v. United States

Money obtained through extortion is taxable. An unlawful gain, as well as a lawful one,
constitutes taxable income when its recipient has such control over it that, as a practical
matter, he derives readily realizable economic value from it. That occurs when cash, as here,
is delivered by its owner to the taxpayer in a manner which allows the recipient freedom to
dispose of it at will, even though it may have been obtained by fraud and his freedom to use it
may be assailable by someone with a better title to it.
Such gains are taxable in the yearly period during which they are realized. This statutory
policy is invoked in the interest of orderly administration. In this case, money was obtained
through extortion.
3. Gross income vis-à-vis net income vis-à-vis taxable income

4. Classificaiton of income as to source
5. Sources of income subject to tax
a. Compensation income
b. Fringe Benefits
Collector v. Henderson
Allowances for rental and travel expenses are only taxable to the benefit of the taxpayers. If
the said allowance did not redound to the benefit of the taxpayers, it is not taxable income.
c. Professional Income
d. Income from business
e. Income from dealings in property
Calasanz v. Commissioner
The assets of a taxpayer are classified for income tax purposes into ordinary assets and
capital assets. If the asset is not among the exceptions, it is a capital asset. If such assets fall
under the exceptions provided by law, they are ordinary assets.
Any gain resulting from the sale or exchange of an asset is a capital gain or an ordinary gain,
depending on the kind of asset involved. Hence, if the taxpayer was engaged in the real estate
business in the course of selling lots, the gains from the sale will be considered as taxable
income.
Tuason v. Lingad
As thus defined by law, the term “capital assets” includes all the properties of a taxpayer
whether or not connected with his trade or business, except: (1) stock in trade or other
property included in the taxpayer’s inventory; (2) property primarily for sale to customers in
the ordinary course of his trade or business; (3) property used in the trade or business of the
taxpayer and subject to depreciation allowance; and (4) real property used in trade or
business.
Under section 34(b) (2) of the Tax Code, if a gain is realized by a taxpayer (other than a
corporation) from the sale or exchange of capital assets held for more than twelve months,
only 50% of the net capital gain shall be taken into account in computing the net income.
Such provision is one that constitutes a statute of partial exemption. Hence, strictissimi juris
would apply.
In the present case, when petition inherited the lands, what was transferred to him was not
merely the duty to respect the contract, but also the right to receive and enjoy the fruits.
Moreover, he owned real properties where he would periodically derive substantial income,
and for which he had to pay real estate dealer’s tax. As far as 1957, he would receive the
rental payment from the lots involved in the present case. The said land was 7 hectares big. It
was subdivided into small lots and sold on installment basis. It had valuable improvements
introduced. There was an owner-realty broker relationship. Sales were made periodically.
Such circumstances would show that it cannot be subject to the exemption.
A capital gain/loss requires the concurrence of 2 conditions: 1) there is a sale or exchange; 2)

the thing sold or exchange is a capital asset.
SMI-ED PH v. CIR
For petitioner’s properties be subject to capital gains tax, the properties must form part of
petitioner’s capital assets. The Tax Code provides which are exempted from the
classification. The properties involved are not among the exclusions provided in the Tax
Code. Hence, they are capital assets. Individuals are taxed on capital gains from sale of all
real properties located in the PH and classified as capita lassets. Corporations are treated
differently. They are imposed a 6% capital gains tax only on the presumed gain realized from
the sale of lands and/or buildings.
CIR v. HSBC
Goodwill is not an ordinary asset as it is not among the exceptions on the definition of a
capital asset.
Chinabank v. CA
An equity investment is a capital asset of the investor, the sale or exchange of which results
in either a capital gain or a capital loss. Losses from sales or exchanges of capital assets shall
be allowed to be deducted only to the extent of the gains from such sales or exchanges.
(Capital Loss Limitation Rule)
Chinabank made a 53% equity investment in the First CBC Capital (Asia) Ltd, a Hong Kong
subsidiary. First CBC became insolvent. With BSP approval, Chinabank wrote-off the
investment in its ITR as a bad debt or as an ordinary loss deductible from its gross income.
The BIR disallowed the deduction on the basis that the debt was not worthless. The Supreme
Court ruled that the equity investment is not indebtedness in the first place but rather capital,
not an ordinary,asset. Shares of stock would be ordinary assets only to a dealer in securities
or a person engaged in the purchase and sale of, or an active trader (for his own account) in,
securities. In the hands, however, of another who holds the shares of stock by way of an
investment, the shares to him would be capital assets. When the shares held by such investor
become worthless, the loss is deemed to be a loss from the sale or exchange of capital assets.
The Court further stated that assuming that the equity investment of CBC has indeed become
"worthless," the loss sustained is a capital, not an ordinary, loss. The rule thus is that capital
loss can be deducted only from capital gains. The capital loss sustained by CBC can only be
deducted from capital gains if any derived by it during the same taxable year that the
securities have become "worthless.
Republic v. Soriano
Since capital gains is a tax on passive income, it is the seller who generally would shoulder
the tax. Accordingly, the BIR, in its BIR Ruling No. 476-2013, dated December 18, 2013,
constituted the DPWH as a withholding agent to withhold the six percent (6%) final
withholding tax in the expropriation of real property for infrastructure projects. As far as the
government is concerned, therefore, the capital gains tax remains a liability of the seller since
it is a tax on the seller’s gain from the sale of the real estate.
Gonzalez v. CTA
Transactions covered by the capital gains tax are sales, exchanges, or other disposition
including pacto de retro sales and other forms of conditional sales. Other dispositions
includes taking by the government through expropriation.
Supreme Transliner v. BPI

A bank is not liable to pay the capital gains tax as a result of a foreclosure sale. In foreclosure
sale, there is no actual transfer of the mortgaged real property until after the expiration of the
one-year period and title is consolidated in the name of the mortgagee in case of non-
redemption. This is because before the period expires there is yet no transfer of title and no
profit or gain is realized by the mortgagor.
Compagnie Financiere Sucres et Denrees v. CIR

Assignment of deposits on stock subscriptions is subject to capital gains tax. The assignment
of the deposits on stock subscriptions results in a net gain. A tax on the profit of sale on net
capital gain is the very essence of the net capital gains tax law. To hold otherwise will
ineluctably deprive the government of its due and unduly set free from tax liability persons
who profited from said transactions.
PALGIC v. SOF
Shares not listed and are sold even when below the fair market value are subject to donor’s
tax, as Sec. 100 of the Tax Code provides that the amount by which the fair MV exceeded the
value of the consideration shall be deemed a gift. Even if there is no actual donation, the
difference in price is considered a donation by fiction of law.
Gregory v. Helvering
A transfer of assets by one corporation to another must have a business purpose.
CIR v. Rufino
It is well established that where stocks for stocks were exchanged, and distributed to the
stockholders of the corporations, parties to the merger or consolidation, pursuant to a plan of
reorganization, such exchange is exempt from capital gains tax. The basic consideration, of
course, is the purpose of the merger, as this would determine whether the exchange of
properties involved therein shall be subject or not to the capital gains tax. The criterion laid
down by the law is that the merger" must be undertaken for a bona fide business purpose and
not solely for the purpose of escaping the burden of taxation." It is clear, in fact, that the
purpose of the merger was to continue the business of the Old Corporation, whose corporate
life was about to expire, through the New Corporation to which all the assets and obligations
of the former had been transferred. The exemption from the tax of the gain derived from
exchanges of stock solely for stock of another corporation was intended to encourage
corporations in pooling, combining or expanding their resources conducive to the economic
development of the country. The merger in question involved a pooling of resources aimed at
the continuation and expansion of business and so came under the letter and intendment of
the NIRC exempting from the capital gains tax exchanges of property.
CIR v. Filinvest Development Corp

The Supreme Court stated that the requisites for the non-recognition of gain or loss of a
transfer of property for shares of stock are as follows: (a) the transferee is a corporation; (b)
the transferee exchanges its shares of stock for property/ies of the transferor; (c) the transfer
is made by a person, acting alone or together with others, not exceeding four persons; and, (d)
as a result of the exchange the transferor, alone or together with others, not exceeding four,
gains control of the transferee.
Rather than isolating FDC, the shares issued to FDC should be appreciated in combination
with the new shares issued to FAI. Together, FDC and FAI’s shares add to 70.99% of FLI’s
shares. Since the term "control" is clearly defined as "ownership of stocks in a corporation
possessing at least fifty-one percent of the total voting power of classes of stocks entitled to
one vote, “the exchange of property for stocks between FDC-FAI and FLI clearly qualify as a
tax-free transaction.
Hen Tong Textiles v. CIR

An attempt to minimize one's tax does not necessarily constitute fraud. It is a settled principle
that a taxpayer may diminish his liability by any means which the law permits.
CIR v. Estate of Toda

Tax avoidance is the tax saving device within the means sanctioned by law. This method
should be used by the taxpayer in good faith and at arm’s length.
f. Passive Investment Income

CIR v. Filinvest Development Corp
CIR’s power of distribution, apportionment, or allocation of gross income and deductions
does not include the power to impute theoretical interests to the controlled taxpayer’s
transactions. While it has been held that the phrase “from whatever source derived” indicates
a legislative policy to include all income not expressly exempted within the class of taxable
income under our laws, the term “income” has been variously interpreted to mean “cash
received or its equivalent”, “the amount of money coming to a person within a specific time”
or “something distinct from principal or capital.” There must be proof of the actual or
probable receipt of realization by the controlled taxpayer of the item of gross income. There
is no evidence of such, and thus, it cannot be imputed. No interests can be due unless
expressly stipulated in writing, as provided under the Civil Code. Such taxes cannot be
presumed beyond what the statute expressly states and clearly declares.
BDO v. Republic (2015 and 2016 <lecture>)

Distinguish between primary and secondary market. The first transaction, because it was
issued to CODE-NGO, it was not yet a deposit substitute. If it is a deposit substitute, there
should be a simultaneous sale to 20 or more depositors. As to the secondary market, there is

no evidence presented if there are 20 or more. If it reached 20 or more, it would have been a
deposit substitute.
Interest income would be exempt from taxes in long-term deposits. If an individual keeps his
deposit or investment for holding period of not less than 5 years, it is exempt from final
withholding tax (Time deposits). As this is a 10-year treasury bond, it would not be subject to
income tax as long as they are reached 5 years.
Fisher v. Trinidad
Stock dividends are not income as they only represent the company’s accumulated profits
that have been capitalized. It is not a realization on the profits of the stockholder, but rather, a
postponement on the realization of the profits.
Commissioner v. Manning
Income tax is assessed on income received from any property, activity, or service that
produces income. Thus, newly acquired shares (and not treasury shares) are subject to income
tax. Stock dividends constitute as income if a corporation redeems stock issued so as to make
a distribution. This is essentially equivalent to the distribution of a taxable dividend the
amount so distributed in the redemption considered as taxable income.
Commissioner v. CA
The redemption converts into money the stock dividends which become a realized profit or
gain and consequently, the stockholder's separate property. Profits derived from the capital
invested cannot escape income tax. As realized income, the proceeds of the redeemed stock
dividends can be reached by income taxation regardless of the existence of any business
purpose for the redemption.
Helvering v. Bruun
It is not necessary to recognition of taxable gain that the lessor be able to sever the
improvement begetting the gain from his original capital.
6. Source rules in determining income from within and without

CIR v. Baier-Nickel
The source of an income is the property, activity or service that produced the income. It is the
physical source where the income came from. With respect of rendition of labor or personal
service, as in the instant case, it is the place where the labor or service is performed that
determines the source of income. There is therefore no merit in A’s interpretation which
equates source of income in labor or personal service with the residence of the payor or the
place of payment of the income.
CIR v. British Overseas Airways Corp; CIR v. Japan Airlines

For the source of income to be considered as coming from the Philippines, it is sufficient that
the income is derived from activity within the Philippines. In ABC’s case, the sale of tickets
in the Philippines is the activity that produces the income. The tickets exchanged hands here
in the country and the payments for fares were also made with Philippine currency. The site
of the source of payments is the Philippines. The absence of flight operations to and from the
Philippines is not determinative of the source of income/site of income taxation for the test of
taxability is the “source.”
South African Airways v. CIR

Off-line air carriers having general sales agents in the Philippines are engaged in or doing
business in the Philippines and that their income from sales of passage documents here is
income from within the Philippines.
CIR v. Marubeni Corp

Marubeni, as a foreign corporation is only taxable on income within the Philippines.
Philamlife v. CTA
Compensation of services from sources within the Philippines are taxable. The services
covered by the management service agreement fall under the meaning of royalties. It is
immaterial if the non-resident foreign corporation has no properties in the Philippines. The
test of taxability is the source and the source of an income is that activity which produced the
income. It is not the presence of any property from which one derives rentals and royalties
that is controlling,63 but rather as expressed under the expanded meaning of royalties, it
includes “royalties for the supply of scientific, technical, industrial, or commercial,
knowledge or information; and the technical advice, assistance or services rendered in
connection with the technical management and administration of any scientific, industrial or
commercial undertaking, venture, project or scheme.
Philippine Guaranty v. CIR and Howden v. CIR

Sources” means the activity, property, or service giving rise to the income. The original
insurance undertakings took place in the Philippines. It is not required that the foreign
corporation be engaged in business in the Philippines. What is controlling is not the place of
business, but the place of activity that created the income. Thus, the income is subject to
income tax.
Quill Corp v. North Dakota

There must be physical presence in a state for the corporation to be liable for sales and use
taxes. It applied its ruling in NATIONAL BELLAS HESS V. DEPARTMENT OF
REVENUE OF ILLINOIS [386 US 753] where it held that a seller whose only connection
with customers in the State is by common carrier or the mail lacked the requisite minimum
contacts with the State. Thus, such vendors are free from state- imposed duties to collect sales
and use taxes. Nevertheless, the US Supreme Court opined that if interstate commerce would
be subject to intolerable or undesirable burdens because of this, Congress has the power to
legislate make such vendors liable for sales and use taxes.
Vodafone International Holdings v. Union of India

VIH had no liability to withhold tax as the transaction was between two non-residents with
no taxable presence in India. Under Section 9(1) of the Income Tax Act of India, all income
accruing or arising, whether directly or indirectly through transfer of capital assets situated in
India shall be deemed to accrue or arise in India.69 The Supreme Court stated that the section
clearly applied to a transfer of capital asset situated in India and could not be expanded to
cover indirect transfers of capital assets or property situated in India. The words “directly or
indirectly” go with the income and not with the transfer of a capital asset.
Commissioner v. CTA & Smith Kline

Where an expense is clearly related to the production of Philippine-derived income or to
Philippine operations (e.g. salaries of Philippine personnel, rental of office building in the
Philippines), that expense can be deducted from the gross income acquired in the Philippines
without resorting to apportionment. However, where there are items included in the overhead
expenses incurred by the parent company, all of which cannot be definitely allocated or
identified with the operations of the Philippine branch, the company may claim as its
deductible share a ratable part of such expenses based upon the ratio of the local branch's
gross income to the total gross income, worldwide, of the multinational corporation.
7. Exclusions from gross income

CIR v. Mitsubishi Metal Corp
Interest income from loans are not automatically exempt from withholding tax. The burden of
proof rests upon the party claiming an exemption to prove that it is in fact covered by the
exemption. In the said case, the Supreme Court found that the foreign government financing
institution had nothing to do with the sales and loans agreement. It is the foreign corporation,
not the foreign government financing institution that is the sole creditor of the domestic
corporation
Pirovano v. Commissioner
Gifts, bequests, and devices are subject to estate or gift taxes.
Intercontinental Broadcasting Corp v. Amarilla

For the retirement benefits to be exempt from income tax, the taxpayer is burdened to prove
the concurrence of the following elements:
1. a reasonable private benefit plan is maintained by the employer;
2. the retiring official or employee has been in the service of the same employer for at
least ten (10) years;
3. the retiring official or employee is not less than fifty (50) years of age at the time of
his retirement; 4. the benefit had been availed of only once
5. The retirement plan must be submitted to and approved by the BIR.
CIR v. CA & GCL Retirement Plans

The interest income coming from the maintenance of a trust to provide retirement, pension,
and disability benefits to employees is not subject to withholding tax. Said retirement benefits
received by officials and employees of private firms in accordance with a reasonable private
benefit plan maintained by the employer shall be exempt from all taxes.
CIR v. CA & Efren Castaneda and Re: Request of Atty. Bernardo Zialcita
Terminal leave pay received by a government official or employee is not subject to
withholding (income) tax. The rationale behind the employee’s entitlement to an exemption
from withholding tax on his terminal leave is that commutation of leave credits, more
commonly known as terminal leave, is applied for by an officer or employee who retires,
resigns, or is separated from the service through no fault of his own. In the exercise of sound
personnel policy, the Government encourages unused leaves to be accumulated. Terminal
leave payments are given not only at the same time but also for the same policy
considerations governing retirement benefits. In fine, not being part of the gross salary or
income of a government official or employee but a retirement benefit, terminal leave pay is
not subject to income tax.
Government of Singapore Investment Corp v. CIR

A financing institution wholly-owned and controlled by a foreign government is exempt from
income tax and final withholding tax with respect to its income derived from investments in
T-bonds.
CIR v. Meralco
Meralco obtained a loan from a foreign bank, with the condition that it would pay the
withholding tax. It continued to pay the taxes, until it found out that the bank was foreign,
and thus, it was exempt from taxes. Given that Meralco was able to discharge the burden of
proof that it was a foreign bank, it is now exempt from taxes.
In any case, no such suit or proceeding shall be filed after the expiration of two (2) years
from the date of payment of the tax or penalty regardless of any supervening cause that may
arise after payment: Provided, however, That the Commissioner may, even without a written
claim therefor, refund or credit any tax, where on the face of the return upon which payment
was made, such payment appears clearly to have been erroneously paid.
As can be gleaned from the foregoing, the prescriptive period provided is mandatory
regardless of any supervening cause that may arise after payment. It should be pointed out
further that while the prescriptive period of two (2) years commences to run from the time
that the refund is ascertained, the propriety thereof is determined by law (in this case, from
the date of payment of tax), and not upon the discovery by the taxpayer of the erroneous or
excessive payment of taxes. Hence, Meralco cannot claim for refund from Jan 1999 to July
2002.
8. Deductions from gross income

CIR v. General Foods
Advertising expenses may be deductible from gross income, depending on the nature of the
advertising expense. The CIR disallowed the deduction arguing that the advertising expenses
are not business expenses but capital expenditures. The Supreme Court ruled in favor of the
CIR.
Advertising is generally of two kinds: (1) advertising to stimulate the current sale of
merchandise or use of services and (2) advertising designed to stimulate the future sale of
merchandise or use of services. The second type involves expenditures incurred, in whole or
in part, to create or maintain some form of goodwill for the taxpayer’s trade or business or for
the industry or profession of which the taxpayer is a member. If the expenditures are for the
advertising of the first kind, then, except as to the question of the reasonableness of amount,
there is no doubt such expenditures are deductible as business expenses. If, however, the
expenditures are for advertising of the second kind, then normally they should be spread out
over a reasonable period of time The protection of brand franchise is analogous to the
maintenance of goodwill or title to one’s property. This is a capital expenditure which should
be spread out over a reasonable period of time. This was akin to the acquisition of capital
assets and therefore expenses related thereto were not to be considered as business expenses
but as capital expenditures. The advertising expense incurred by General Foods fall under the
second type.
CIR v. Isabela Cultural Corp

Deductions partake of the nature of tax exemptions. Hence, they are likewise strictly
construed against the taxpayer.
Isabela Corp failed to claim the expenses for professional services that accrued in 1984 and
1985 during the said years. Instead, it sought to claim them as deductions during the taxable
year of 1986. The Supreme Court held that one of the requisites for the deductibility of a
business expenses is that it must have been paid or incurred during the taxable year. Hence,
the professional fees should have been claimed as deductions during the years where they
were paid or incurred.
Esso Standard Eastern Inc. v. CIR

Margin fees are not deductible business expenses. Esso made profit remittances to its New
York Head Office. Esso claims that the margin fees it paid to the Central Bank on the
remittances are ordinary and necessary expenses and should be deducted from its gross
income.
The Supreme Court held that margin fees are not necessary and ordinary expenses. The
margin fees are not expenses in connection with the production or earning of petitioner's
incomes in the Philippines. Since the margin fees in question were incurred for the remittance
of funds to petitioner's Head Office in New York, which is a separate and distinct income
taxpayer from the branch in the Philippines, for its disposal abroad, it can never be said
therefore that the margin fees were appropriate and helpful in the development of petitioner's
business in the Philippines exclusively or were incurred for purposes proper to the conduct of
the affairs of petitioner's branch in the Philippines exclusively or for the purpose of realizing
a profit or of minimizing a loss in the Philippines exclusively
Cohan v. Commissioner
Cohan claimed substantial travel and entertainment expenses, but he could not provide
adequate records. The US Court held that he should be permitted to use estimates to establish
his entitlement to business expense deductions. The rule allowing deduction of expenses is
based on the principle that if the IRS asserts a deficiency but other evidence clearly indicates
that some deduction should be allowed, the court can develop its own estimate.
“Absolute certainty in such matters is usually impossible and is not necessary; the Board
should make as close an approximation as it can, bearing heavily if it chooses upon the
taxpayer whose inexactitude is of his own making. True, we do not know how many trips
Cohan made, nor how large his entertainments were; yet there was obviously some basis for
computation, if necessary by drawing upon the Board's personal estimates of the minimum of
such expenses.”
***Btw, I looked up Cohan Rule, and it’s no longer applied in several jurisdictions idk if
applied pa din here, omg kakatulog ko kasi to sa mga classes natin 
Calanoc v. Collector
Most of the items of expenditures contained in the statement submitted to the agent are either
exorbitant or not supported by receipts. Calanoc claims further that the accountant who
prepared the statement of receipts is already dead and could no longer be questioned on the
items contained in said statement. The payment of P461.65 for police protection is illegal as
it is a consideration given by Calanoc to the police for the performance by the latter of the
functions required of them to be rendered by law. The expenditures of P460.00 for gifts,
P1,880.05 for parties and other items for representation are rather excessive, considering that
the purpose of the exhibition was for a charitable cause, therefore are disallowed as
deductions. admitted that he could not justify the other expenses, such as those for police
protection and gifts.
Rutkin v. United States

Money obtained through extortion is taxable. An unlawful gain, as well as a lawful one,
constitutes taxable income when its recipient has such control over it that, as a practical
matter, he derives readily realizable economic value from it. Such occurs when cash is
delivered by its owner to the taxpayer in a manner which allows the recipient freedom to
dispose of it at will, even though it may have been obtained by fraud and his freedom to use it
may be assailable by someone with a better title to it.
C.M. Hoskin & Co. v. CIR

Payment by C.M. Hoskin & Co. (CMHC) to Mr. Hoskins of the additional sum of
P99,977.91 as his 50% share of the 8% supervision fees received by petitioner as managing
agents of the subdivision projects was inordinately large and could not be accorded the
treatment of ordinary and necessary expenses allowed as deductible items under the Tax
Code. If payment of such were to be allowed as a deductible item, then Hoskins would
receive on these 3 items alone (salary, bonus and supervision fee) which would be double the
petitioner's reported net income. The 50% of the supervision fee of petitioner was being paid
to Hoskins for as long as its contract with the subdivision owner subsisted, regardless of
whether services were actually rendered by Hoskins.
The test of reasonableness, that: "It is a general rule that 'Bonuses to employees made in good
faith and as additional compensation for the services actually rendered are deductible,
provided such payments, when added to the stipulated salaries, do not exceed a reasonable
compensation for the services rendered'
Kuenzle & Streiff v. CIR

The test of reasonableness, that: "It is a general rule that 'Bonuses to employees made in good
faith and as additional compensation for the services actually rendered are deductible,
provided such payments, when added to the stipulated salaries, do not exceed a reasonable
compensation for the services rendered' The conditions to the deduction of bonuses to
employees are: (1) the bonus is in fact compensation; (2) it is for personal services actually
rendered; and (3) the bonuses, when added to the salaries, are 'reasonable . . . when measured
by the amount and quality of the services performed with relation to the business of the
particular taxpayer'
2. Salaries, wages and other forms of compensation for personal

services actually rendered, including the grossed-up monetary
value of the fringe benefit subjected to fringe benefit tax which
tax should have been paid
a. Excessive compensation
b. Bonuses
Aguinaldo Industries Corp. v. CIR
In computing net income there shall be allowed deductions such expenses in general which
includes all the ordinary and necessary expenses paid or incurred during the taxable year in
carrying on any trade or business, including a reasonable allowance for personal services
actually rendered.
The bonus given to the officers of Aguinaldo Corp. as their share of the profit realized from
the sale of its Muntinlupa land cannot be deemed a deductible expense for tax purposes, even
if the aforesaid sale could be considered as a transaction for carrying on the trade or and the
grant of the bonus to the corporate officers pursuant to its by-laws could, as an intra-corporate
matter, be sustained. The records show that the sale was effected through a broker who was
paid a commission for his services. There is absolutely no evidence of any service actually
rendered by Aguinaldo’s officers.
3. Traveling and Transportation Expenses

Zamora v. Collector
Claim for the deduction of promotion expenses or entertainment expenses must also be
substantiated or supported by record showing in detail the amount and nature of the expenses
incurred. The application of Mrs. Zamora for dollar allocation shows that she went abroad on
a combined medical and business trip, not all of her expenses came under the category of
ordinary and necessary expenses; part thereof constituted her personal expenses. The SC held
as reasonable the CIR’s decision, which considered 50% of the said amount as business
expenses and the other 50%, as her personal expenses. To be deductible, said business
expenses must be ordinary and necessary expenses paid or incurred in carrying on any trade
or business; that those expenses must also meet the further test of reasonableness in amount;
that when some of the representation expenses claimed by the taxpayer were evidenced by
vouchers or chits, but others were without vouchers or chits, documents or supporting papers;
that there is no more than oral proof to the effect that payments have been made for
representation expenses allegedly made by the taxpayer and about the general nature of such
alleged expenses
4. Rentals and/or Payments for Use/Possession of Property

5. Entertainment/Representation Expenses
6. Enumeration of Business Expenses Not Exclusive
i. Advertising Expenses
CIR v. General Foods
To be deductible from gross income, the subject advertising expense must comply with the
following requisites: (a) the expense must be ordinary and necessary; (b) it must have been
paid or incurred during the taxable year; (c) it must have been paid or incurred in carrying on
the trade or business of the taxpayer; and (d) it must be supported by receipts, records or
other pertinent papers. There is yet to be a clear-cut criteria or fixed test for determining the
reasonableness of an advertising expense. There being no hard and fast rule on the matter, the
right to a deduction depends on a number of factors such as but not limited to: the type and
size of business in which the taxpayer is engaged; the volume and amount of its net earnings;
the nature of the expenditure itself; the intention of the taxpayer and the general economic
conditions.
Advertising is generally of two kinds: (1) advertising to stimulate the current sale of
merchandise or use of services and (2) advertising designed to stimulate the future sale of
merchandise or use of services. The second type involves expenditures incurred, in whole or
in part, to create or maintain some form of goodwill for the taxpayer’s trade or business or for
the industry or profession of which the taxpayer is a member. If the expenditures are for the
advertising of the first kind, then, except as to the question of the reasonableness of amount,
there is no doubt such expenditures are deductible as business expenses. The subject
advertising expense was of the second kind. Not only was the amount staggering; the GFP
itself also admitted, in its letter protest to the CIR’s assessment, that the subject media
expense was incurred in order to protect GFP’s brand franchise. The protection of brand
franchise is analogous to the maintenance of goodwill or title to one’s property. This is a
capital expenditure which should be spread out over a reasonable period of time.
Atlas Consolidated Mining & Development Corp. v. CIR

Ordinarily, an expense will be considered "necessary" where the expenditure is appropriate
and helpful in the development of the taxpayer's business. It is "ordinary" when it connotes a
payment which is normal in relation to the business of the taxpayer and the surrounding
circumstances. The term "ordinary" does not require that the payments be habitual or normal
in the sense that the same taxpayer will have to make them often; the payment may be unique
or non-recurring to the particular taxpayer affected. There is no hard and fast rule on the
matter. The right to a deduction depends in each case on the particular facts and the relation
of the payment to the type of business in which the taxpayer is engaged. The intention of the
taxpayer often may be the controlling fact in making the determination.
The expenditure paid to P.K. Macker & Co. as compensation for services carrying on the
selling campaign in an effort to sell Atlas' additional capital stock of P3,325,000 is not an
ordinary expense. That the expense in question was incurred to create a favorable image of
the corporation in order to gain or maintain the public's and its stockholders' patronage, does
not make it deductible as business expense. Efforts to establish reputation are akin to
acquisition of capital assets and, therefore, expenses related thereto are not business expense
but capital expenditures.
ii. Cost of Materials

iii.Repairs and Maintenance
iv.Expenses under Lease Agreements
v. Expenses for Professionals
CIR v. Isabela Cultural Corp.
Deductions partake of the nature of tax exemptions and are strictly construed against the
taxpayer.
Isabela Corp failed to claim the expenses for professional services that accrued in 1984 and
1985 during the said years and instead sought to claim them as deductions during the taxable
year of 1986. Professional fees should have been claimed as deductions during the years
where they were paid or incurred. In order to be eligible for deduction, a business expense
must have been paid or incurred during the taxable year.
vi.Litigation Expenses
Atlas Consolidated Mining & Development Corp. v. CIR (repeated)

vii. Political Campaign Expenses
viii. Training Expenses
b. Interest
1. Definition of Interest Expense
2. Requisites for Deductibility
CIR v. Vda. De Prieto
In computing net income there shall be allowed as deductions: “(b) Interest: (1) In general –
The amount of interest paid within the taxable year on indebtedness, except on indebtedness
incurred or continued to purchase or carry obligations the interest upon which is exempt from
taxation as income” “Indebtedness” is an unconditional and legally enforceable obligation for
the payment of money. Tax may be considered an indebtedness. “Debt” embraces not merely
money due by contract but whatever one is bound to render to another, either for contract, or
the requirement of the law. Where a statute imposes a personal liability for a tax, the tax
becomes a debt. The interest paid by respondent for the late payment of her donor’s tax is
deductible from her gross income under the Tax Code. Although interest payment for
delinquent taxes is not deductible as tax under Sec. 30(c) of the Tax Code and Sec. 80 of the
Income Tax Regulations, a taxpayer is not precluded from claiming said interest payment as
deduction under Sec. 30(b) of the same.
3. Non-Deductible Interest Expense

4. Interest Subject to Special Rules
a. Interest Paid in Advance
b. Interest Periodically Amortized
c. Interest Incurred to Acquire Property to use in Trade or Business
Paper Industries Corp. v. CA
Paper Industries claimed as deductions against gross income interest payments on loans for
the purchase of machinery and equipment. The CIR disallowed the deduction on the ground
that because the loans had been incurred for the purchase of machinery and equipment, the
interest payments on the said loans should have been capitalized instead and claimed as a
depreciation deduction taking into account the adjusted basis of the machinery and equipment
(original acquisition cost plus interest charges) over the useful life of such assets.
Paper Industries is entitled to its claimed deduction for interest payments on loans for, among
other things, the purchase of machinery and equipment. The general rule is that interest
expenses are deductible against gross income and this certainly includes interest paid under
loans incurred in connection with the carrying on of the business of the taxpayer. In this case,
the CIR does not dispute that the interest payments were made on loans incurred in
connection with the carrying on of the registered operations of Paper Industries, i.e., the
financing of the purchase of machinery and equipment actually used in the registered
operations of Paper Industries. Neither does the CIR deny that such interest payments were
legally due and demandable under the terms of such loans, and in fact paid by Paper
Industries during the tax year. The CIR has been unable to point to any provision of the Tax
Code or any other Statute that requires the disallowance of the interest payments made by
Paper Industries. The general rule that interest payments on a legally demandable loan are
deductible from gross income must be applied.
d. Reduction of Interest Expense/Interest Arbitrage
c. Taxes
2. Non-Deductible Taxes
3. Treatments of Surcharges/Interests/Fines for Delinquency
Gutierrez v. Collector
The phrase “all income derived from whatever source” encompasses all accessions to wealth,
clearly realized, and over which the taxpayers have complete dominion. A gain constitutes
taxable income when its recipient has such control over it that as a practical matter, he
derives readily realizable economic value from it. It includes all income not expressly
excluded or exempted from the class of taxable income, irrespective of the voluntary or
involuntary action of the taxpayer in producing the income.
4. Treatment of Special Assessment

5. Limitations on Deductions
6. Credit Against Taxes of Foreign Countries
Commissioner v. Lednicky
US citizens residing in the Philippines who derives income wholly from sources within the
Philippines, sought to deduct from their gross income the income taxes they have paid to the
US government. To allow an alien resident to deduct from his gross income whatever taxes
he pays to his own government is incompatible with the status of the Philippines as a
sovereign state. This is because the foreign government will have the power to reduce the tax
income of the Philippine government simply by increasing their tax rates.
a. Tax Credit vis-à-vis Deduction

CIR v. Central Luzon Drug Corp.
Tax credit is an amount that is "subtracted directly from one’s total tax liability" as an
"allowance against the tax itself" (withheld taxes, payments of estimated tax, investment tax
credits → used AFTER tax has been computed. It reduces the tax due, including, whenever
applicable, income tax that is determined after applying the corresponding tax rates to taxable
income. There must be a tax liability before tax credit can be applied. Without that liability,
any tax credit application will be useless
Tax deduction is a subtraction "from income for tax purposes," or an amount that is "allowed
by law to reduce income prior to application of the tax rate to compute the amount of tax
due” → used BEFORE tax has been computed. It reduces the income that is subject to tax in
order to arrive at taxable income. If a net loss is reported by, and no other taxes are currently
due from, a business establishment, there will obviously be no tax liability against which any
tax credit can be applied.
Carlos Superdrug Corp. v. DSWD

A tax credit is a peso-for-peso deduction from the taxpayer’s tax liability or a full recovery
while a tax deduction only benefits the taxpayer to the extent of a percentage of the amount
granted as a discount.
M.E. Holding Corp. v. CA

Under RA 9257 or the Expanded Senior Citizens Act of 2003, starting taxable year 2004, the
20% sales discount shall be treated as a tax deduction and no longer as a tax credit.
d. Losses
2. General Types of Losses
a. Ordinary Losses
b. Casualty Losses
c. Net Operating Loss Carry-Over (NOLCO)
Paper Industries Corp. v. CA (repeated)

3. Other Types of Losses
a. Capital Losses
b. Securities Becoming Worthless
c. Losses on Wash Sales of Stocks or Securities
d. Wagering Losses
e. Bad Debts
Philex Mining Corp. v. CIR
Philex cannot deduct the amounts as bad debt. The agreement provided for a distribution of
assets of the mine upon termination, a provision that is more consistent with a partnership
than a creditor-debtor relationship. In this connection, there is no contractual basis for the
execution of the two compromise agreements in which Baguio Gold recognized a debt in
favor of Philex. Philex’s advances should be treated as investments in a partnership. The
advances were not "debts" of Baguio Gold to Philex inasmuch as the latter was under no
unconditional obligation to return the same to the former.
As for the amounts that Philex paid as guarantor to Baguio Gold’s creditors, the debts were
not yet due and demandable at the time that Philex paid the same. Philex cannot claim the
advances as a bad debt deduction from its gross income. Deductions for income tax purposes
partake of the nature of tax exemptions and are strictly construed against the taxpayer, who
must prove by convincing evidence that he is entitled to the deduction claimed. In this case,
Philex failed to substantiate its assertion that the advances were subsisting debts of Baguio
Gold that could be deducted from its gross income. Consequently, it could not claim the
advances as a valid bad debt deduction.
Phil. Refining Corp. v. CA

A declaration by the taxpayer that a debt is worthless is not sufficient for it to claim a bad
debt deduction. Before a debt can be considered worthless, the taxpayer must also show that
it is indeed uncollectible even in the future. PRC here failed to prove the worthlessness of the
amounts receivable.
Fernandez Hermanos Inc. v. CIR

The deduction was improper. Assuming that in this case there was a valid and subsisting debt
and that the debtor was incapable of paying the debt, the debt is still not deductible as a
worthless debt because the debtor was still in operation. It has been held that if the debtor
corporation, although losing money or insolvent, was still operating at the end of the taxable
year, the debt is not considered worthless and therefore not deductible.
2. Effect of Recovery of Bad Debts

f. Depreciation
Basilan Estates v. CIR
Basilan Estates claimed deductions for the depreciation of its assets up to 1949 on the basis of
their acquisition cost. In 1950, however, it changed the depreciable value of the assets by
increasing it to conform with the increase in cost of their replacement. Accordingly, in 1950
to 1953, the company deducted from gross income the value of the depreciation based on this
reappraised value. Such value cannot be deducted from gross income as it was beyond the
acquisition cost.
Depreciation as a deduction is allowed so that the owner of the assets can set aside some
money to buy a replacement or, in other words, to gradually recover the acquisition cost. The
income tax law does not authorize the depreciation of an asset beyond its acquisition cost.
The reason is that deductions from gross income are privileges, not matters of right. More
importantly, the recovery, free of income tax, of an amount more than the invested capital in
an asset will run counter to the purpose of a depreciation allowance. For then, the taxpayer
can not only recover the acquisition cost, but also make some profit. Recovery in due time
through depreciation of investment made is the philosophy behind depreciation allowance;
the idea of profit on the investment made has never been the underlying reason for the
allowance of a deduction for depreciation.
Limpan Investment Corp. v. CIR

Depreciation is a question of fact and is not measured by theoretical yardstick, but should be
determined by a consideration of actual facts", and the findings of the Tax Court in this
respect should not be disturbed when not shown to be arbitrary or in abuse of discretion. The
excess depreciation of building was added back into the computation of net income, since the
depreciation expense deducted was excessive.
Net Income by BIR, which was affirmed by the SC, was computed this way:
Net Income as declared by Limpan in the return + undeclared rental receipt + excess
depreciation of building
2. Methods of Computing Depreciation Allowance

a. Straight-line Method
b. Declining-balance Method
c. Sum-of-the-years Method
g. Depletion
Consolidated Mines, Inc. v. CTA
Sec. 30(g) (1) (B) of the Tax Code provides that in computing net income there shall be
allowed as deduction, in the case of mines, a reasonable allowance for depletion not to
exceed the market value in the mine of the product which has been mined and sold during the
year for which the return is made.
The formula for computing the rate of depletion is: Rate of Depletion Per Unit = (Cost of
Mine Property) / (Estimated ore Deposit of Product Mined and sold)
As in connection with all other tax controversies, the burden of proof to show that a
disallowance of depletion by the Commissioner is incorrect or that an allowance made is
inadequate is upon the taxpayer, and this is true with respect to the value of the property
constituting the basis of the deduction.
D. Optional Standard Deduction

E. Personal and Additional Exemption
Pansacola v. CIR
Exemptions are fixed at arbitrary amounts intended to substitute for the disallowance of
personal or living expenses as deductible items from the taxable income of certain individual
taxpayers. The amounts represent roughly the equivalent of the taxpayer’s minimum
subsistence and those of his dependents. what the law should consider for the purpose of
determining the tax due from an individual taxpayer is his status and qualified dependents at
the close of the taxable year and not at the time the return is filed and the tax due thereon is
paid.
Soriano v. Secretary of Finance

A minimum wage earner is one who is paid the statutory minimum wage if such person
works in the private sector, or not more than the statutory minimum wage in the non-
agricultural sector where he is assigned, if he is a government employee. Minimum wage
earner is the status acquired if one receives wages not exceeding the prescribed minimum
wage.
F. Items Not Deductible

G. Transfer Pricing
HM v. Glaxosmithkline
A proper application of the arm’s length principle requires that regard be had for the
“economically relevant characteristics” of the arm’s length and non-arm’s length
circumstances to ensure they are “sufficiently comparable.” The “economically relevant
characteristics of the situations being compared” may make it necessary to consider other
transactions that impact the transfer price under consideration. Such circumstances will
include agreements that may confer rights and benefits in addition to the purchase of property
where those agreements are linked to the purchasing agreement. The objective is to determine
what an arm’s length purchaser would pay for the property and the rights and benefits
together where the rights and benefits are linked to the price paid for the property.
In this case, GSK was paying for at least some of the rights and benefits under the License
Agreement as part of the purchase prices for ranitidine from Adechsa. As such, the License
Agreement could not be ignored in determining the reasonable amount paid to Adechsa
which applies not only to payment for goods but also to payment for services.
CIR v. Filinvest Development Corp.

Requisites for the non-recognition of gain or loss of a transfer of property for shares of stock
are as follows: (a) the transferee is a corporation; (b) the transferee exchanges its shares of
stock for property/ies of the transferor; (c) the transfer is made by a person, acting alone or
together with others, not exceeding four persons; and, (d) as a result of the exchange the
transferor, alone or together with others, not exceeding four, gains control of the transferee.
Rather than isolating FDC, the shares issued to FDC should be appreciated in combination
with the new shares issued to FAI. Together, FDC and FAI’s shares add to 70.99% of FLI’s
shares. Since the term "control" is clearly defined as "ownership of stocks in a corporation
possessing at least fifty-one percent of the total voting power of classes of stocks entitled to
one vote, “ the exchange of property for stocks between FDC-FAI and FLI clearly qualify as
a tax-free transaction.
Despite the seemingly broad power of the CIR to distribute, apportion and allocate gross
income under Section 50, the same does not include the power to impute theoretical interest
even with regard to controlled taxpayers’ transactions. This is true even if the CIR is able to
prove that the interest expense was in fact claimed by FDC. The term in the definition of
gross income that even those income “from whatever source derived” is covered still requires
that there must be actual or at least probable receipt or realization of the time of gross income
sought to be apportioned, distributed or reallocated. Finally, under the Civil Code, no interest
shall be due unless expressly stipulated in writing.
Cynamid Phil. Inc. v. CTA

The imposition of Improperly Accumulated Taxable Income (IAET) discouraged tax
avoidance through corporate surplus accumulation. When corporations do not declare
dividends, income taxes are not paid on the undeclared dividends received by the
shareholders. The tax on improper accumulation of surplus is essentially a penalty tax
designed to compel corporations to distribute earnings so that the said earnings by
shareholders could, in turn, be taxed.
The formula used under the Immediacy Test, to determine the “reasonable needs” of
business” in order to justify an accumulation of earnings, is used only for administrative
convenience and not a precise rule. In companies where the formula was applied, they had
operating cycles shorten than that of Cynamid. The ratio of current assets to current liabilities
should be used to determine the sufficiency of working capital which ideally should be 2:1.
Cyanamid’s ratio is 2.21:1 and, thus, there was no need to infuse working capital.
Avon Products Mfg. Inc. v. CIR, CTA

The requirement of stating the law and the facts upon which the assessment is made is
deemed complied with when the petitioner was able to refute the findings of the revenue
examiner’s stated in the Assessment Notices (in this case, Avon explained its position on the
different items of assessments.
The 3 year prescriptive period for expanded withholding tax shall commence to run from the
last day for filing of the Monthly Remittance Return of Income Taxes Withheld or from the
date of filing thereof if filed after such last day
CIR v. Macquarie Securities, CTA ***I can’t find this case***

I. Exempt Corporations
1. Propriety Educational Institutions and Hospitals
CIR v. St. Luke’s Medical Center (2012)
Charitable institutions are not ipso facto entitled to a tax exemption. The requirements for a
tax exemption are specified by the law granting it. The power of Congress to tax implies the
power to exempt from tax. Congress can create tax exemptions, subject to the constitutional
provision that “No law granting any tax exemption shall be passed without the concurrence of
a majority of Congress” The requirements for a tax exemption are strictly construed against
the taxpayer because an exemption restricts the collection of taxes necessary for the existence
of the government.
Even if the charitable institution must be “organized and operated exclusively” for charitable
purposes, it is nevertheless allowed to engage in “activities conducted for profit” without
losing its tax-exempt status for its not-for-profit activities. The only consequence is that the
“income of whatever kind and character” of a charitable institution “from any of its activities
conducted for profit, regardless of the disposition made of such income, shall be subject to
tax.” Prior to the introduction of Section 27 (B), the tax rate on such income from for-profit
activities was the ordinary corporate rate under Section 27 (A). With the introduction of
Section 27 (B), the tax rate is now 10%.
The Court finds that St. Luke's is a corporation that is not “operated exclusively” for
charitable or social welfare purposes insofar as its revenues from paying patients are
concerned. This ruling is based not only on a strict interpretation of a provision granting tax
exemption, but also on the clear and plain text of Section 30 (E) and (G). Section 30 (E) and
(G) of the NIRC requires that an institution be “operated exclusively” for charitable or social
welfare purposes to be completely exempt from income tax. An institution under Section 30
(E) or (G) does not lose its tax exemption if it earns income from its for-profit activities. Such
income from for-profit activities, under the last paragraph of Section 30, is merely subject to
income tax, previously at the ordinary corporate rate but now at the preferential 10% rate
pursuant to Section 27 (B).
CIR v. De La Salle University (2016)

Article XIV, Section 4 (3) does not require that revenues and income must have also been
sourced from educational activities or activities related to the purposes of an educational
institution. The phrase all revenues is unqualified by any reference to the source of revenues.
Thus, so long as the revenues and income are used actually, directly and exclusively for
educational purposes, then said revenues and income shall be exempt from taxes and duties.
In concrete terms, the lease of a portion of a school building for commercial purposes,
removes such asset from the property tax exemption granted under the Constitution. There is
no exemption because the asset is not used actually, directly and exclusively for educational
purposes. The commercial use of the property is also not incidental to and reasonably
necessary for the accomplishment of the main purpose of a university, which is to educate its
students.
However, if the university actually, directly and exclusively uses for educational purposes the
revenues earned from the lease of its school building, such revenues shall be exempt from
taxes and duties. The tax exemption no longer hinges on the use of the asset from which the
revenues were earned, but on the actual, direct and exclusive use of the revenues for
educational purposes.
Income and revenues of non-stock, non-profit educational institution not used actually,
directly and exclusively for educational purposes are not exempt from duties and taxes. To
avail of the exemption, the taxpayer must factually prove that it used actually, directly and
exclusively for educational purposes the revenues or income sought to be exempted.
2. GOCCs
PAGCOR v. BIR
The original exemption of PAGCOR from corporate income tax was not made pursuant to a
valid classification based on substantial distinction so that the law may operate only on some
and not on all. Instead, the same was merely granted to the acquiescence of the House
Committee on Ways and Means to the request of PAGCOR. The argument that the
withdrawal of the exemption violates the non- impairment clause will not hold since any
franchise is subject to amendment, alteration or repeal by Congress. The Court, however,
made clear that PAGCOR remains to be exempt from VAT. Nowhere in RA 9337 is it
provided that PAGCOR can be subjected to VAT. Thus, the provision of RR 16- 2005 which
the BIR issued to implement the VAT law subjecting PAGCOR to VAT is invalid for being
contrary to RA 9337.
3. Others
Dumaguete Credit Cooperative v. CIR
Since interest from any Philippine currency bank deposit yield or any other monetary benefit
from deposit substitutes are paid by banks, other entities such as cooperative are not required
to withhold the corresponding tax on the interest from savings and time deposits of its
members. The fact that “similar arrangements” is preceded by banking terms means that
those subject to withholding must have deposit peculiarities. This is also consistent with the
preferential treatment accorded to members of cooperatives who are exempt in the same way
as the cooperative themselves.
CIR v. G. Sinco Educational Corp.

The amount of fees charged by the school depends upon the policy and a given
administration at a given time and is not conclusive of the purposes of the institution. It does
not in itself make a school a profit- making enterprise.
J. Taxation of Resident Citizens, Non-Resident Citizens,

and Resident Aliens
K. Taxation of Non-Resident Aliens Engaged in Trade or
Business
L. Taxation of Non-Resident Aliens not Engaged in Trade
or Business
M. Individual Taxpayers Exempt from Income Tax

N. Taxation of Domestic Corporations
1. Tax Payable
a. Regular Tax
b. Minimum Corporate Income Tax (MCIT)
i. Imposition of MCIT
Chamber of Real Estate & Builder’s Assoc. v. Romulo
Commissioner v. PAL
PAL under PD 1590 (its franchise) was liable only for basic corporate income tax or
franchise tax, whichever is lower and this is in lieu of all other taxes, except real property.
The CIR contends that PAL is subject to MCIT while it was the contention of PAL that the
MCIT was included in the “in lieu of all other taxes” provision. The Supreme Court noted
there is a distinction between taxable income, which is the basis for basic corporate income
tax; and gross income, which is the basis for the MCIT under Section 27(E). The two terms
have their respective technical meanings, and cannot be used interchangeably. Hence, the
basic corporate income tax cannot cover MCIT since the basis for the first is the annual net
taxable income; while the basis for the second is gross. Thus, MCIT is included in “all other
taxes” from which PAL is exempted.
O. Taxation of Resident Foreign Corporations

1. General Rule
2. With Respect to Their Income from Sources Within the Philippines
3. MCIT
4. Tax on Certain Income
5. International Carrier
6. Offshore Banking Units
7. Branch Profits Remittances

Bank of America v. CA
In the operation of the withholding tax system, the payee is the taxpayer, the person on whom
the tax is imposed, while the payor, a separate entity, acts no more than an agent of the
government for the collection of the tax in order to ensure is payment. Obviously, the amount
thereby used to settle the tax liability is deemed sourced from the proceeds constitutive of the
tax base.
In the 15% remittance tax, the law specifies its own tax base to be on the “profit remitted
abroad.” There is absolutely nothing equivocal or uncertain about the language of the
provision. The tax is imposed on the amount sent abroad, and the law (then in force) calls for
nothing further. The remittance tax was conceived in an attempt to equalize the income tax
burden on foreign corporations maintaining, on the one hand, local branch offices and
organizing, on the other hand, subsidiary domestic corporations where at least a majority of
all the latter’s shares of stock are owned by such foreign corporation.
Compania General de Tabacos de Filipinas v. CIR, CTA

The 15% Branch Profit Remittance Tax should be based on the profits actually remitted
abroad. "The tax base upon which the 15% branch profit remittance tax shall be imposed on
the profit actually remitted abroad and not on the total branch profits out of which the
remittance is to be made." Further, passive income already subjected to the final tax should
not be included in the tax base for computing the 15% branch profits remittance tax.
Thus, in view of the fact that petitioner's branch profit remittance tax for 1985 (partial) and
1986 were paid on May 3, 1988, after the effectivity of Revenue Memorandum Circular No.
6-82 (March 17, 1982), then what should apply as taxable base in computing the 15% branch
profit remittance tax is the amount applied for with the Central Bank as profit to be remitted
abroad and not the total amount of branch profits.
Rightfully so petitioner has sufficiently established a right to be refunded the amount of

branch profit remittance tax paid on interests and dividends received from money market
placements and interest not effectively connected with its trade or business which were
included as part of the branch profits for 1985 (partial) and 1986.
P. Taxation of Non-Resident Foreign Corporations

1. General Rule
2. Tax on Certain Income
A) Interest on Foreign Loans
B) Intercorporate Dividends
CIR v. Procter & Gamble Philippines
Tax Code does not require that the foreign country’s tax laws deemed the parent-corporation
to have paid the dividend tax waived by the Philippines. The Code only requires that the
foreign country shall allow the corporation a “deemed paid” tax credit in an amount
equivalent to the percentage points waived by the Philippines.
If the country of domicile of the recipient corporation allows a credit against the tax
imposable by it an amount equivalent to 20% of the dividends remitted from a Philippine
domestic corporation to corporations domiciled therein, the dividends remitted are subject to
FWT at the preferential rate of 15% in accordance with Section 28 (b)(5)(b) of the Tax Code
of 1997, as amended.
Interpublic Group of Companies v. CIR

US Corporation, who owns 30% of total and outstanding voting capital stock of a Philippine
advertising company filed a claim for the refund or issuance of a TCC for overpaid FWT on
dividends withheld and remitted by the Philippine company. In the administrative claim, the
US corporation alleged that, as a non-resident foreign corporation, it may avail of the
preferential FWT rate of 15% on cash dividends received from a domestic corporation during
the taxable year 2006. The CIR, in response, raised the question of whether the US
corporation is entitled to the FWT at the rate of 15% or the rate of 20% in accordance with
the RP-US Tax Treaty. CTA ruled that application of any tax treaty relief is not necessary or
a condition precedent by law.
Sal Oppenheim Jr. v. CIR

CTA held that an availment of a tax treaty provision must be preceded by an application for a
tax treaty relief with the BIR's International Tax Affairs Division.
Mirant v. CIR
Mirant made income payments to VHL enterprises, a US nonresident foreign corporation and
to WES World, a UK nonresident foreign corporation. It accordingly withheld the tax due on
these interest payments. Thereafter, Mirant filed for a refund contending that the two foreign
corporations have created “permanent establishments” in the Philippines and thus making
applicable the lower withholding tax rate under the RP-UK and RP-US tax treaties. The CTA
noted that under those treaties, VHL and WES World, while not having a fixed place of
business have established “permanent establishments” in the Philippines because they have
“furnished services through their employees or other personnel for a period or periods the
aggregate of which is more than 183 days in a twelve-month period."
However, under RMO 01-2000, it is provided that the availment of a tax treaty provision
must be preceded by an application for a tax treaty relief with its International Tax Affairs
Division (ITAD). A foreign corporation wishing to avail of the benefits of the tax treaty
should invoke the provisions of the tax treaty and prove that indeed the provisions of the tax
treaty applies to it, before the benefits may be extended to such corporation. The CTA noted
that Mirant did not make such application, and CTA finally held that the income payments of
Mirant to VHL and WES, which are both non-resident foreign corporations, are subject to the
final tax of 32%.
(***Between Mirant and Interpublic, Mirant is followed for purposes of the bar)
Deutsche Bank AG v. CIR

The denial of the availment of tax relief for the failure of a taxpayer to apply within the
prescribed period under the administrative issuance would impair the value of the tax treaty.
At most, the application for a tax treaty relief from the BIR should merely operate to confirm
the entitlement of the taxpayer to the relief. Long story short, an RMO cannot add a
requirement that would deprive a party of a benefit granted by a tax treaty. Tax Treaty >
RMO.
Non-compliance with the 15-day period for prior application should not operate to
automatically divest entitlement to the tax treaty relief especially in claims for refund. On the
other hand, the underlying principle of prior application with the BIR becomes moot in
refund cases, such as the present case, where the very basis of the claim is erroneous or there
is excessive payment arising from non-availment of a tax treaty relief at the first instance. In
this case, petitioner should not be faulted for not complying with RMO No. 1-2000 prior to
the transaction. It could not have applied for a tax treaty relief within the period prescribed,
precisely because it erroneously paid the BPRT.
CIR v. S.C. Johnson and Sons, Inc.

Supreme Court interpreted the MFN clause, or the phrase “paid under similar circumstances”
as referring to the manner of payment of taxes and not the subject matter of the tax which is
royalties. The CIR found that the RP-US and RP-Netherland tax treaties show a similarity on
the manner of payment of taxes, that is, the allowable foreign tax credit on both treaties is the
amount actually paid in the Philippines. Thus, the royalty payments by Energizer to Eveready
are subject to the preferential tax rate of 15% of the gross amount of royalties pursuant to the
"most-favored-nation" provision of the RP-US tax treaty in relation to the RP-Netherlands
tax.
The concessional tax rate of 10% provided for in the RP-Germany Tax Treaty could not
apply to taxes imposed upon royalties in the RP-US Tax Treaty since the two taxes imposed
under the two tax treaties are not paid under similar circumstances and do not contain similar
provisions on tax crediting. It is not proved that the RP-US Tax Treaty grants similar tax
reliefs to residents of the US in respect of the taxes imposable upon royalties earned from
sources within the Philippines as those allowed to their German counterparts. Further, the
RP-Germany Tax Treaty allows for crediting against German income and corporate tax of
20% of the gross amount of royalties paid under the law of the Philippines. On the other
hand, the RP-US Tax Treaty does not provide for the similar crediting of 20% of the gross
amount of royalties paid. The similarity in the circumstances of payment of taxes is a
condition for the enjoyment of most favored nation treatment precisely to underscore the
need for equality of treatment. since the RP-US Tax Treaty does not give a matching tax
credit of 20 percent for the taxes paid to the Philippines on royalties as allowed under the RP-
West Germany Tax Treaty, XYZ cannot be deemed entitled to the 10 percent rate granted
under the latter treaty for the reason that there is no payment of taxes on royalties under
similar circumstances.
Q. Improperly Accumulated Earnings of Corporations

Cynamid Philippines Inc. v. CA

The imposition of IAET discouraged tax avoidance through corporate surplus accumulation.
When corporations do not declare dividends, income taxes are not paid on the undeclared
dividends received by the shareholders. The tax on improper accumulation of surplus is
essentially a penalty tax designed to compel corporations to distribute earnings so that the
said earnings by shareholders could, in turn, be taxed.
The IAET is being imposed in the nature of a penalty to the corporation for the improper
accumulation of its earnings, and as a form of deterrent to the avoidance of tax upon
shareholders who are supposed to pay dividends tax on the earnings distributed to them by
the corporation.
CIR v. Tuason
CIR assessed Tuason, Inc. for IAET. The CIR presumed that when Tuason, Inc. accumulated
profits, the purpose was to avoid the income tax on its shareholders on the finding that it was
a mere holding or investment company. Tuason contended it was for the purpose of
expanding their business as a real estate broker. The Supreme Court ruled that Tuason was
liable for IAET. Tuason was a mere holding company as it was not involved itself in the
development of the subdivisions but merely subdivided its own lots and sold them for bigger
profits. It derived its income from interest, dividends, and rental from the sale of realty. The
touchstone of liability is the purpose behind the accumulation of the income and not the
consequences of the accumulation. The company's failure to distribute dividends to its
stockholders was clearly for reasons other than the reasonable needs of the business.
Manila Wine Merchants v. CIR

Manila Wine Merchants (MWM) invested in several companies and bought shares in Wack
Wack Golf and Country Club and likewise acquired US Treasury Bills. CIR found that
MWM had unreasonably accumulated a surplus. On appeal, the CTA ruled that the purchase
of shares were harmless. However, the CTA also ruled that the purchase of US Treasury Bills
was in no way related to the business of importing and selling wines and ordered MWM to
pay IAET on the said treasury bills. One of the contentions of MWM was that it will be used
to aid its importations The Supreme Court ruled against MWM. It noted that the bonds were
bought in 1951 and until 1961; it was never used to aid MWM’s importations. To justify an
accumulation of earnings and profits for the reasonably anticipated future needs, such
accumulation must be used within a reasonable time after the close of the taxable year.
R. Exemption from Tax on Corporations

S. Taxation of Partnerships
T. Taxation of General Professional Partnerships
U. Withholding Tax
1. Concept
Filipinas Synthetic Fiber Corp. v. CA
Tax Code is silent as to when the duty to withhold taxes arises. In this case, to determine
when the duty to withhold the taxes arose, the Court inquired into the nature of accrual
method of accounting, the procedure used by the taxpayer, and to the modus vivendi of
withholding tax at source come. It noted that under the accrual basis method of accounting,
income is reportable when all the events have occurred that fix the taxpayer’s right to receive
the income and the amount can be determined with reasonable accuracy. Such method is
allowed by law in reporting incomes.
CIR v. Smart Communications

Generally, the person entitled to claim a tax refund is the taxpayer. However, if the taxpayer
does not file the claim, the withholding agent may file the same, notwithstanding the fact that
the agent and taxpayer are not related parties. The right of the withholding agent to claim a
refund of erroneously or illegally withheld taxes comes with the responsibility to return the
same to the taxpayer. While the withholding agent has the right to recover the taxes
erroneously or illegally collected, he nevertheless has the obligation to remit the same;
otherwise, he would be unjustly enriching himself at the expense of the principal taxpayer
from whom the taxes were withheld, and from whom he derives his legal right to file a claim
for refund.
A withholding agent has a legal right to file a claim for refund. First, he is considered a
taxpayer under the Tax Code as he is personally liable for the withholding tax as well as for
deficiency assessments, surcharges, and penalties, should the amount withheld be finally
found to be less than the amount that should have been withheld. Second, as an agent of the
taxpayer, his authority to file the income tax return and remit the tax withheld to the
government includes the authority to file a claim for refund and to bring an action for
recovery of such claim.
CIR v. Mirant Philippines

Any VAT-registered person, whose sales are zero-rated or effectively zero-rated may, within
two (2) years after the close of the taxable quarter when the sales were made, apply for the
issuance of a tax credit certificate or refund of creditable input tax due or paid attributable to
such sales, except transitional input tax, to the extent that such input tax has not been applied
against output tax. unutilized input VAT payments not otherwise used for any internal
revenue tax due the taxpayer must be claimed within two years reckoned from the close of
the taxable quarter when the relevant sales were made pertaining to the input VAT regardless
of whether said tax was paid or not. Prescriptive period commences from the close of the
taxable quarter when the sales were made and not from the time the input VAT was paid nor
from the time the official receipt was issued.
The payments covered by the OR were for goods and service purchases made by Mirant
through the progress billings from Mitsubishi for the period covering April 1993 to
September 1996—for the E & M Equipment Erection Portion of Mirant’s contract with
Mitsubishi. It is likewise undisputed that said payments did not include payments for the
creditable input VAT of Mirant.
In net effect, Mirant did not, for the VATable Mirant-Mitsubishi 1993 to 1996 transactions
adverted to, immediately pay the corresponding input VAT. The OR clearly reflects the
belated payment of input VAT corresponding to the payment of the progress billings from
Mitsubishi for the period covering April 7, 1993 to September 6, 1996.
RCBC v. CIR
From July 20, 2001, that is, the date of RCBC’s filing of protest, it had until September 18,
2001 to submit relevant documents and from such date, the CIR had until March 17, 2002 to
issue his decision. As admitted by RCBC, the protest remained unacted by the CIR.
Therefore, it had until April 16, 2002, within which to elevate the case to this court. Thus,
when RCBC filed its Petition for Review on April 30, 2002, the same is outside the 30-day
period. Consequently, RCBC is precluded from disputing the correctness of the assessment.
LG Electronics Philippines v. CIR

Income tax is the "tax on all yearly profits arising from property, professions, trades or
offices, or as a tax on a person’s income, emoluments, profits and the like." Withholding tax
is a method of collecting income tax in advance. "In the operation of the withholding tax
system, the payee is the taxpayer, the person on whom the tax is imposed, while the payor, a
separate entity, acts no more than an agent of the government for the collection of the tax in
order to ensure its payment. Obviously, the amount thereby used to settle the tax liability is
deemed sourced from the proceeds constitutive of the tax base.
The withholding agent cannot be made liable for the tax due because it is the [taxpayer] who
earned the income subject to withholding tax. The withholding agent is liable only insofar as
he failed to perform his duty to withhold the tax and remit the same to the government. The
liability for the tax, however, remains with the taxpayer because the gain was realized and
received by him.
In the case of withholding taxes, the incidence and burden of taxation fall on the same entity,
the statutory taxpayer. The burden of taxation is not shifted to the withholding agent who
merely collects, by withholding, the tax due from income payments to entities arising from
certain transactions and remits the same to the government. Due to this difference, the
deficiency VAT and excise tax cannot be "deemed" as withholding taxes merely because they
constitute indirect taxes. Moreover, records support the conclusion that AIA was assessed not
as a withholding agent but, as the one directly liable for the said deficiency taxes.
2. Kinds
Chamber of Real Estate & Builder’s Association v. Romulo
3. Filing of Return & Payment of Taxes Withheld

4. Final Withholding Tax at Source
5. Creditable Withholding Tax
6. Timing of Withholding
ING Bank N.V. v. CIR
The tax on compensation income is withheld at source under the creditable withholding tax
system wherein the tax withheld is intended to equal or at least approximate the tax due of the
payee on the said income. It was designed to enable (a) the individual taxpayer to meet his or
her income tax liability on compensation earned; and (b) the government to collect at source
the appropriate taxes on compensation. Taxes withheld are creditable in nature. Thus, the
employee is still required to file an income tax return to report the income and/or pay the
difference between the tax withheld and the tax due on the income. For over withholding, the
employee is refunded. Therefore, absolute or exact accuracy in the determination of the
amount of the compensation income is not a prerequisite for the employer’s withholding
obligation to arise.
The obligation of the payor/employer to deduct and withhold the related withholding tax
arises at the time the income was paid or accrued or recorded as an expense in the
payor’s/employer’s books, whichever comes first. ING Bank accrued or recorded the bonuses
as deductible expense in its books. Therefore, its obligation to withhold the related
withholding tax due from the deductions for accrued bonuses arose at the time of accrual and
not at the time of actual payment.

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CHIT: Tax 1 Finals Reviewer

A. Income Tax Systems

B. Features of the Philippine Income Tax Law

C. Criteria in Imposing PH Income Tax

D. Types of PH Income Tax

c. Special class of Individual Employees

d. Estates and Trusts

Marubeni Corp v. CIR

CIR v. British Overseas Airways Corp

CIR v. Japan Airlines

South African Airways v. CIR

Air Canada v. CIR

c. Joint Ventures and consortiums

Afisco Insurance Corp v. CIR

4. General Professional Partnerships

Commissioner v. Glenshaw Glass

a. Difference between income and capital

Old Colony Trust v. Commissioner

North American Oil Consolidated v. Burnet

a. Cash method vis-à-vis with Accrual Method

1. Economic Benefit Test

2. All Events Test

2. Concept of income from whatever source derived

a. Money found by chance

When a taxpayer acquires earnings, lawfully or unlawfully, without the consensual

Rutkin v. United States

3. Gross income vis-à-vis net income vis-à-vis taxable income

A capital gain/loss requires the concurrence of 2 conditions: 1) there is a sale or exchange; 2)

Supreme Transliner v. BPI

Compagnie Financiere Sucres et Denrees v. CIR

CIR v. Filinvest Development Corp

Hen Tong Textiles v. CIR

CIR v. Estate of Toda

f. Passive Investment Income

BDO v. Republic (2015 and 2016 <lecture>)

should be a simultaneous sale to 20 or more depositors. As to the secondary market, there is

6. Source rules in determining income from within and without

CIR v. British Overseas Airways Corp; CIR v. Japan Airlines

South African Airways v. CIR

CIR v. Marubeni Corp

Philippine Guaranty v. CIR and Howden v. CIR

Quill Corp v. North Dakota

Vodafone International Holdings v. Union of India

Commissioner v. CTA & Smith Kline

7. Exclusions from gross income

Intercontinental Broadcasting Corp v. Amarilla

CIR v. CA & GCL Retirement Plans

Government of Singapore Investment Corp v. CIR

8. Deductions from gross income

CIR v. Isabela Cultural Corp

Esso Standard Eastern Inc. v. CIR

Rutkin v. United States

C.M. Hoskin & Co. v. CIR

Kuenzle & Streiff v. CIR

2. Salaries, wages and other forms of compensation for personal

3. Traveling and Transportation Expenses

4. Rentals and/or Payments for Use/Possession of Property

Atlas Consolidated Mining & Development Corp. v. CIR

CIR v. Macquarie Securities, CTA I can’t find this case